'Exaggerated' pandemic benefits fuelled 'excess demand,' driving steeper rate hikes: Scotiabank
Scotiabank estimates Tiff Macklem could have stopped raising interest rates at 2.5% if not for excess demand from pandemic benefits. Read on.
Canadian Inflation: Mostly Temporary and Foreign, But Pandemic Programs Have a Major Impact on Policy Rates
Additional authors: Réne Lalonde
"We use our macroeconometric forecasting model to identify the causes of the rise in inflation since the end of 2019 and the required monetary response. A number of key observations flow from our work:
a. Around 50% of the increase in inflation observed since the end of 2019 can be ascribed to global or foreign factors. These include US inflation, commodity prices and movements in the exchange rate.
b. Supply challenges that largely reflect developments at the global level account for another 35% of the rise in inflation.
c. The welcome, but likely exaggerated, fiscal support provided by the Federal government in response to the pandemic: the Canada Emergency Response Benefit, the Canada Recovery Benefit, the Canada Wage Subsidy, and the Canada Rent Relief Program had a major impact on the output gap. We estimate that these programs raised the output gap by about 1.3 percentage points, implying that the excess demand we see now in Canada would not be present without these supports."
So in summary; Inflation is partly the fault of the pandemic and Ottawa throwing out too much cash to people and partly the fault of outside/international factors, and supply challenges.
Oddly, I've never been so glad NOT to get CERB as I am right now. Sadly I also know of people who got it, who didn't think and just spent it on stuff that they wanted, not needed, and now whining about having to pay part of it back in taxes. Considering the over 'gift' of it, maybe more should be paid back. (I know, not very "left" or "liberal" of me, is it?)
